Amazon: 2022 Shareholder Letter

Beyond cost-cutting, Amazon is also framing its future as a growth-oriented company. By Benjamin Tan

Amazon (AMZN 0.00%↑) is often cited as an original blueprint for hypergrowth, with Jeff Bezos as a model founder-CEO who is relentlessly focused on the customer and long-term market leadership. The company went public on May 15, 1997, at $18, or a split-adjusted equivalent of 7.5 cents, as of 2023. At the time of its initial public offering, Amazon’s market valuation was just below $500 million.

Today, it is in excess of $1 trillion. Annual revenue has grown from $15 million in 1996, to more than $500 billion in 2022.

In 2005, Amazon Prime pioneered a paid membership service for shoppers by offering free 2-day shipping; since then, Prime boxes have become ubiquitous

2022 Shareholder Letter: Calling out Profitability First

Andy Jassy took over as Amazon CEO from Bezos in mid-2021 and wrote his second shareholder letter, which was published on April 13th. His tone is understandably upbeat and forward-looking, despite current macroeconomic conditions and recent layoffs.

Of particular emphasis is business rationalization - below is the first paragraph highlighted by Jassy in the letter:

Over the last several months, we took a deep look across the company, business by business, invention by invention, and asked ourselves whether we had conviction about each initiative’s long-term potential to drive enough revenue, operating income, free cash flow, and return on invested capital.

After years of heavy investments - especially in its retail business during the pandemic period - Amazon is taking stock of its cost structure. Even though Amazon practically invented the concept of “growth at all cost”, current market environment is not conductive to sustaining such practices. Profitability is everything as investors seek shelter in names that can generate consistent (and growing) earnings. Aggressive investing for growth is no longer appreciated as cost of capital has escalated rapidly.

AWS + Advertising: Twin Growth Engines

World of advertising: Amazon is demonstrating the power of its walled gardens to deliver higher ROI to advertisers

After detailing various cost-cutting initiatives in the letter, Jassy pivots to an extensive discussion of Amazon Web Services (“AWS”) and its advertising businesses, two of the most profitable and fastest growing segments at Amazon. The message is clear: even at current scale, their growth rates are not plateauing anytime soon.

AWS continues to see a "robust" new customer pipeline. In fact, migration from on-premise to public cloud is only in its early innings, given that 90% of global IT spending is still on-premise. Amazon is concurrently focusing on chip development to deliver higher performance at lower cost - this bolds well for future AWS profitability, even as competition against Microsoft’s Azure (MSFT 0.00%↑) and Alphabet's GCP (GOOG 0.00%↑) heats up.

AWS is still in the early stages of its evolution, and has a chance for unusual growth in the next decade.

Before Amazon started reporting advertising as a separate segment, who would have expected the company to earn more ad dollars than YouTube? In 2022, advertising brought in $38 billion in revenue, compared to $29 billion earned by the latter.

Jassy: “our Advertising revenue has continued to grow rapidly…even as most large advertising-focused businesses’ growth have slowed”

Retailers are increasingly reliant on Amazon marketplace, which counts more than 200 million Prime members. Amazon not only has the right customer relationships with high purchase intent, but also relevant first-party data (culled from purchase histories stretched over years across multiple product categories) to facilitate effective targeting, attributions, and conversions. The company is building more integrations into its walled garden, including clean room technology, streaming, and third-party publishers.

Amazon: Still Investing for Renewal of S-Curves

Beyond existing businesses, Jassy lists out several new initiatives that may become significant revenue contributors in the future:

• Buy with Prime: targeting merchants to offer their products to Prime members without selling on Amazon marketplace

• Healthcare: Including Amazon Pharmacy and online-offline primary care via acquisition of One Medical

• Kuiper, a satellite-based broadband internet service: Essentially a Starlink competitor involving Blue Origin, the aerospace company founded by Bezos…..

Some of them sound farfetched, but people also thought the same about this former online bookseller branching into cloud computing back in the 2000s.

Amazon reports Q1 2023 results on April 27th.

(Author is long Amazon)

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